$200B in Projected LossesMay 19th, 2020
Lloyd’s of London’s Forecast for the Insurance Industry
Last week, Lloyd’s of London forecasted that the property and casualty insurance marketplace would suffer over $200B worth of losses as a result of the pandemic. The largest losses will hit trade credit, business interruption and event cancellation coverage. Additionally, investment losses will hurt insurers.
John Neal, the CEO of Lloyd’s said that “’(t)his is a loss of a magnitude that none of us have seen in our lifetime.’” Unlike past large losses attributable to events like 9/11 and destructive hurricanes, “(t)he difference this time is the global extent of the crisis”; one where “’each customer was sustaining the same loss at the same time everywhere in the world.’”
Paycheck Protection Program—Update on Gov’t Investigations into Potential Abuse
According to a Reuters’ piece late Friday afternoon, the Justice Department has “…sent grand jury subpoenas to big banks seeking records as part of a broader investigation into potential abuse of (the) $660 billion” Paycheck Protection Program (“PPP”).
A quick recap/background…in light of the pandemic, Congress has already passed two massive stimulus bills (and the House has passed a third that is rumored to be dead on arrival with the Senate). PPP loans were part of both of the passed bills. The PPP itself was designed to help small businesses remain on their feet during this economic crisis by taking loans (for payroll, rent, etc.) which are backed by the federal government. If certain circumstances are met, these loans are forgivable in full.
The sheer size of the PPP invites potential fraudulent behavior by both the business borrowers and the processing banks. On the borrowing side, businesses have been repeatedly warned about criminal prosecution in the event they give fraudulent loan documentation and/or certifications. In fact, the Department of Justice has already pursued a number of actions directly against borrowers. On the lending side, commentators believe that although banks are not the direct targets of the recently issued subpoenas, there is little doubt that their loan processing behavior will be the subject of future investigations geared at ferreting out fraud in connection with the PPP.
How Will BI Claims be Paid?
As we’ve mentioned in previous posts, the biggest conundrum facing insurers and insureds right now is how insureds will recoup business interruption losses that may or may not be covered under their property insurance. There are two routes insureds are taking in search of financial relief. The first is litigation. We continue to see lawsuits where insureds are arguing that their property policies cover COVID-19 related BI losses.
The second route is the legislative route. Both state legislatures and Congress have proposed various bills designed to amend insurance contract terms in order to retroactively cover BI losses. Although none of these bills have passed, they have proven particularly worrisome to the insurance industry. The general consensus in the industry is that general property policies were not designed to cover these types of losses, and that retroactive amendments to provide BI coverage could bankrupt insurers.
Congress also has two bills currently circulating that are designed to prospectively protect insureds. The prospective bill getting the most press (and most initial bipartisan support) is the Pandemic Risk Insurance Act (PRIA) which is similar to the Terrorism Risk Insurance Act (TRIA) that was passed after 9/11. “PRIA would establish a federal reinsurance program…in order to: 1. (p)rotect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of business interruption coverage for losses resulting from a pandemic or outbreak of communicative disease; and 2. (a)llow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving State insurance regulation and consumer protections.”
PRIA is supported by insurance industry influencers like the Risk Insurance Management Society (RIMS) which informed Congress that losses to its members as a result of COVID-19 would be astronomical, and action is needed to prevent a similar outcome when the next outbreak of a pandemic or communicative disease occurs. As to COVID-19 related losses, RIMS noted in late April “…that 66 percent of its members ‘will have direct business interruption losses as a result of COVID-19,’ 77% of those companies expect the losses to be over US$1 million, and 36 percent expect the losses to be more than US$25 million.”
Coronavirus to cost insurers more than $200bn, ft.com, Oliver Ralph, May 14, 2020.
Exclusive: U.S. Justice Dept. subpoenas Wall Street banks for small business loans info-sources Reuters, Koh Gui Qing and Pete Schroeder, May 15, 2020.
COVID-19: Legislation Seeks to Establish a Federal Reinsurance Program to Insure Future Pandemic-Related Business Interruption Losses, U.S. Insurance Recovery and Counseling Alert, K&L Gates, John M. Sylvester, Daniel F.C. Crowley, Laura K. Veith, May 15, 2020.